Tuesday, November 06, 2007

Damned if you do...

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low down payments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

Now, and for a variety of reasons, some two million of those loans have gone sour, and the same politicians are searching for villains. Leading the charge is House Financial Services Chairman Barney Frank, who is accusing banks of "predatory lending"--by which he means making loans to the very group of borrowers that Mr. Frank and his colleagues urged banks to serve.

As early as today, Mr. Frank plans to hold a committee vote on his Mortgage Reform and Anti-Predatory Lending Act of 2007, which would impose new rules and financial penalties on subprime lenders, while providing new lawsuit opportunities for distressed borrowers. "People should not be lent money that's beyond what they can be expected to pay back," Mr. Frank says. Now, there's an idea. Why didn't the bankers think of that?

Mr. Frank's proposal is a trial lawyer's dream. It would forbid banks from signing up borrowers for "overly expensive loans"; require banks to make sure that the consumer has a "reasonable ability to repay the loan"; and insist that loans must be "solely in the best interest of the consumer." This kind of murky language would invite litigation from every borrower who misses a payment. If it becomes law we can expect to see billboards reading: "Behind on your mortgage? For relief, call 1-800-Sue-Your-Banker."